Industry
Energy, Resources & Utilities
Rebalance the energy equation
Highlights
- Utilities need to reposition themselves, both to improve their resilience and capitalize on the opportunities from the energy transition.
- Digital transformation can help the industry unlock opportunities and broaden the horizon of utilities beyond energy.
- We discuss the key trends driving the energy transition and the role of technology and propose a three-pronged framework to steer this transition successfully.
In this article
Transitions ahead
Accelerating the pace of energy transition has become a pressing priority
Long before the COVID-19 pandemic exposed the utility industry’s vulnerability to systemic risks, the pressure was building on utilities to transition from hydrocarbon dependence toward cleaner energy resources along with searching for new roles and responsibilities. WEF reveals that over 80% of the countries worldwide are making an improvement on their energy transition targets. Factors such as progressive regulations, consumerization of energy technologies, emphasis on energy security, the convergence of industry boundaries, and the shift from consumers to prosumers (consumers who are also producers) are driving radical change in the energy landscape. Yet, despite the progress, accelerating the pace of energy transition has become a pressing priority. Recent disruptions such as supply chain bottlenecks induced by the pandemic, geopolitical tensions, Europe’s energy crisis, competition from non-utility players, and evolving customer expectations pose significant challenges for utilities.
Utilities need to reposition themselves, both to improve their resilience and capitalize on the opportunities from the energy transition. The answer lies in leveraging digital transformation to identify sustainable, prosumer-centric business models and creating a partner ecosystem that unlocks opportunities and broadens the horizon of utilities beyond energy. We discuss the key trends driving the energy transition and the role of technology and propose a three-pronged framework to steer this transition successfully.
Dynamic landscape
Defining energy transition and the factors driving it
What makes the current energy transition different from any of its predecessors is the urgency to protect the planet from this century’s biggest challenge. That of achieving carbon neutrality by 2050 and transitioning from fossil-fuel-based systems of energy production and consumption to cleaner, renewable energy resources while simultaneously creating new moments of truth for the prosumers. We must empower prosumers to play a greater role in the energy value chain. Additionally, innovating new roles and responsibilities for the utilities of tomorrow and looking beyond energy to tap into newer business models are equally pressing needs. Let us dive deep into the four key trends propelling this transition:
Socio-political and economic forces: Utilities face increasing pressure from political, consumer, and economic forces to make renewable energy widely accessible and affordable. Moreover, Europe’s energy crisis is far from over. The steep reductions in natural gas supplies to Europe are negatively impacting consumers, businesses, and economies, in Europe and emerging and developing economies.
Tightening regulatory landscape: With the increasing adoption of renewable energy technologies, there is an emphasis on electricity market reforms with a renewed focus on sustainability, reliability, and affordability. Energy is at the heart of the global response to the 2030 Agenda for Sustainable Development and the Paris Agreement. This demands a complete transformation, as also recently noted in COP27. Energy network companies must adopt a framework that serves to enforce price controls to transform the energy networks, deliver emissions-free green energy, and promote local ownership of renewable energy production and supply.
Rapidly advancing technology: Utilities need help keeping pace with rapid technological development in energy and exponential technologies. Distributed energy resources (DER), electric vehicle (EV), energy efficiency, demand side management, and distributed generations help digitize operational processes and decentralize and democratize energy provisioning. Exponential technologies such as IoT (internet of things), AI-ML, cloud, 5G, and drones, on the other hand, help utilities move to a state of cognitive operations, orchestration, and automation driven by real-time energy insights.
The rise of prosumers: Thanks to the growing awareness around climate change, the rise of energy prosumers and their active participation in the utility value ecosystem present an excellent opportunity to accelerate the transition. Utilities are leveraging the shift to create new revenue streams, increase customer lifetime value, and introduce new products and services co-designed with prosumers.
Three key pillars
Successfully navigating the energy transition: Leaning on the key pillars
Evolving into utilities of the future requires companies to do two things right. First, they must continue to excel in their long-standing responsibilities around safety, reliability, and affordability. And second, they must cater to the evolving needs and expectations of environmental performance, resilience across the value chain, greater control and choice for the prosumers, and innovation in the ecosystem.
Adopting a three-pronged framework focusing on resilience, experience, and new business models can help energy companies get this right. Each of the three pillars has an ‘internal’ and an ‘external’ focus to help utilities derive their full potential at the point of intersection. The internal focus addresses the challenges and opportunities within the organization, whereas the external focus speaks to outside factors impacting the transition.
- Strengthening resilience: Internally, building resilience is aimed at streamlining asset management, protecting against decrease in revenue from energy sales, preventive maintenance of aging assets, and migrating from fragmented legacy systems to digitalized ways of working to improve productivity and cybersecurity. On the other hand, building external resilience is about safeguarding utility operations from natural disasters, pandemics, price volatility and regulations, and competition from new and existing sources. Building resilience against Europe’s recent energy crisis, for instance, is one of the key priorities for most utilities now. The projected increase in energy costs from the crisis amount to nearly €1 trillion, about 6% of the EU’s annual GDP.
- Creating a new experience: Enhancing the utilities’ experience internally focuses on empowering employees and the field force to become context-aware through the help of digital technologies such as AR and VR and build a connected workforce. Externally, enriching the experience focuses on creating new moments of truth for the prosumers by introducing innovative products and services. For example, a leading Australian energy retailer is helping prosumers combine solar power with batteries. The utility encourages prosumers to participate in their virtual power plant (VPP) program, combining the power from solar with the batteries of prosumers, for attractive billing incentives.
- Building an ecosystem for new business models: Internally, this revolves around advancements like EV charging and renewable infrastructure management, using gamification for energy consumption advisory, and others. Externally, the convergence of industry boundaries ushers in new opportunities, such as entering the home renovation business with builders and new business models, including community solar or subscription-based renewable renting.
Striking the right balance
Will the benefits pay off the cost of the energy transition?
For the first time ever, the global demand for each of the fossil fuels, namely coal, oil, and natural gas has shown a peak or a plateau, according to a recent report by the World Energy Outlook (WEO) 2022. This implies that the total demand for fossil fuels could decline from the mid-2020s through to 2050 by an annual average roughly equivalent to the lifetime output of a large oil field. This is indeed encouraging. But there’s more to it as energy transition, by its very nature, is inflationary. And that’s due to its heavy reliance on supply chains for materials and commodities used in energy production and transition. Some of the countries that witnessed a significant energy transition from 2010 to 2020 saw the carbon intensity of their grid reduce by up to 55%, even as retail electricity prices shot up by up to 59%. Cut to today, the supply chains for energy transition commodities are strained by volatile economic, political, and environmental factors. Does this mean the energy transition will result in higher electricity prices for consumers? Well, the jury is still out on this one. Because the transition will be nuanced at various levels, but one thing is certain - the time to jumpstart this process is now.
